Thank You

Error.

Ben Bernanke met the press Thursday, something Federal Reserve chairmen have never done. Think of it as spring training in February as he took swings at softball pitches at the National Press Club in Washington.

In a few weeks, he'll have to handle some high, hard ones from Congress. Bernanke won't have to face chin music from Jim Bunning, the former Hall of Fame hurler and Republican senator who didn't treat him with the obsequiousness usually reserved for Fed chairman. Perhaps more daunting will be to testify before Ron Paul, the libertarian from Texas who chairs the House Financial Services Subcommittee on Domestic Monetary Policy since the GOP takeover of the House of Representatives last year.

Proving Lincoln's adage you can fool some of the people all of the time, Bernanke asserted to the credulous DC press corps that while the Fed's purchases of Treasury securities played a role in the rise in stock prices since last August, they did not affect the prices of commodities, notably food. Moreover, he rejected the premise that the civil unrest seen in Egypt and Tunisia could be attributed to Fed policy, which the questioner contended was responsible for higher food prices.

Commodity prices, including food, were driven by supply and demand, the Fed chairman argued. And that demand was being elevated by rising prosperity in emerging economies, which means a desire for a better diet. That, in turn, was mainly responsible for the sharp rise in food prices.

At the same time, the liquidity created by the Fed's purchases of up to $600 billion of Treasury securities was working as planned, Bernanke continued. According to the Fed chairman, QE2 has boosted asset prices, notably stocks; lowered market volatility and thus, risk; narrowed corporate-credit risk spreads; and has lifted inflation premia in the Treasury Inflation Protected Securities market. That Treasury yields are higher since the Fed started buying Treasury securities is not inconsistent with QE2's working.

That's been the Fed's story, and Bernanke was sticking to it.

With regards to commodities inflation in developing economies, Bernanke asserted that central banks there were equipped to deal with it. They could raise interest to quash price pressures and also allow the exchange rates of their currencies to appreciate to counter imported inflation.

The latter assertion bolsters suspicions that the motivation of QE2 was to force emerging economies to permit appreciation of their currencies. In other words to debase the greenback to lower unemployment. And especially relative to the currency of America's most important trading partner, the Chinese yuan.

Expanding dollar liquidity through QE2 leaves central banks abroad with basically two choices: sterilize the inflows resulting from trade surpluses and capital flows, which involves expansionary domestic monetary policies; or insulate domestic monetary policy from international influences and allow the currency to appreciate.

China, of course, is tightening monetary policy to curb inflation and cool an overheating economy. The surfeit of dollars forces the Chinese central bank to expand the supply of yuan to buy up greenbacks in order to control the exchange rate. Or China can opt to the yuan appreciate instead -- just as the Obama administration wants. So far, China has not acceded to that pressure.

Let's assume the Fed isn't that clever. Taking Bernanke at his word, QE2 has been responsible for the rise in U.S. stock values, which Wilshire Associates calculates at over 26% since Aug. 26, the day before the Fed chief broached the idea of increased Treasury purchases at the central bank's Jackson Hole confab. That has enriched holders of American equities by some $3.3 trillion, 5½ times as much as the Fed's planned purchases of U.S. government securities; not a bad payoff on that score.

Relative to gold, which should be viewed as a currency unencumbered by a country, the dollar has lost about 10% of its value based on the appreciation of the
SPDR Gold Shares ETF gld -0.1197268326417704%SPDR Gold TrustU.S.: NYSE Arca115.5415
-0.1385-0.1197268326417704%
/Date(1425414156999-0600)/
Volume (Delayed 15m)
:
3205968
P/E Ratio
N/AMarket Cap
N/A
Dividend Yield
N/ARev. per Employee
N/AMore quote details and news »gldinYour ValueYour ChangeShort position
(GLD) since the launch of QE2 was proposed in late August. Measured in gold terms, the real gain in U.S. equity values is only about half as great as measured in devalued dollars.

What Bernanke didn't address was the uneven impact of the rise of equity values and commodity prices. The theory he espouses is that monetary policy works through boosting asset prices, which in turn encourages consumer spending, business investment and then hiring. He did not mention that a major channel for the transmission of monetary policy -- the housing market -- has broken down, which is obvious given record-low housing starts and simultaneously near-record-low mortgage rates.

The Fed chairman did assert that rising costs for food and fuel are not feeding through to so-called core inflation and, by implication, weren't a cause for concern now. As he noted, the jump in food and energy costs have not increased compensation. The Labor Department reported earlier Thursday that unit-labor costs fell 1.5% in 2010, matching the decline in 2009. That was the result of a 3.6% increase in productivity last year, a hair higher than 2009's rise.

There isn't a manager in American business who isn't getting his staff to do more with less. The vise on hiring and compensation is even tighter as costs of materials rise. And so the Fed's efforts to boost employment may backfire if companies try to offset rising input prices by holding down personnel costs..

Bernanke didn't have to deal with that in the mostly fat pitches served up by the National Press Club. Ron Paul has posed pointed questions about how exactly the central bank's monetary policy will increase employment. The Fed chief better be ready for some Major League breaking balls when he heads to Capitol Hill.